July 15 (Bloomberg) -- JPMorgan Chase & Co. Chief Executive
Officer Jamie Dimon told investors last week that rising
interest rates could trigger a “dramatic reduction” in the
bank’s mortgage profits. According to its own analysts, the U.S.
housing market will extend its recovery regardless.

The rate for 30-year home loans jumped to 4.51 percent last
week from a near record-low of 3.35 percent in early May after
Federal Reserve Chairman Ben S. Bernanke indicated the central
bank may slow its purchases of government and mortgage bonds.
Refinancing, which has slumped to the lowest in two years, may
drop by as much as 40 percent in the second half of this year,
JPMorgan Chief Financial Officer Marianne Lake said July 12.

Home prices rising at the fastest pace since 2006 can
withstand higher rates as lenders ease underwriting standards,
job growth fuels demand and the supply of distressed properties
dwindles, JPMorgan analysts led by John Sim wrote in a July 10
report. The New York-based researchers increased their forecast
for price appreciation to 10.1 percent this year from 7 percent
in March.

“There has been widespread concern that rising rates may
hurt the housing recovery,” the analysts said. “We do not
think that the recent market move will change the broader story
of increased homebuyer activity.”

Bernanke said last month that rates have risen in part
because of optimism about the economy and “perceptions of the
Federal Reserve.” Home prices rose 12.1 percent in April from
the prior year, according to the S&P/Case-Shiller Index, with
increases in each of the 20 cities in the measure.

‘More Optimistic’

“People are more optimistic about housing. They expect
house prices to continue to rise,” he said. That “compensates
to some extent for a slightly higher mortgage rate.”

Growth has been driven by a lack of housing stock coupled
with demand from institutional investors, including private
equity firm Blackstone Group LP, which has purchased more than
30,000 single-family homes to rent. The number of homes for sale
fell 5 percent to 1.74 million in January from the year-earlier
period, the fewest since December 1999, according to the
National Association of Realtors.

For banks, including Wells Fargo & Co., the nation’s
largest home-loan lender, and No. 2 JPMorgan, rising rates may
be more detrimental after the lenders benefited from record
profit margins in the mortgage business in 2012. Refinancing
accounted for 76 percent of last year’s $1.75 trillion in loan
originations. Originations may fall 10 percent this year, the
Mortgage Bankers Association forecast in a June 20 report.

Relatively Robust

“For most mortgages outstanding now, the rate does not
provide an incentive for refinancing,” said Walt Schmidt, a
mortgage strategist at FTN Financial. “These margins have
remained relatively robust for the banks and they’re not going
to be making that money anymore.”

Wells Fargo, one of the biggest beneficiaries of the
housing recovery, originated almost 1 in 3 mortgages in 2012,
helping it post a third straight year of record profit. The firm
said last week that it made $2.8 billion from mortgage banking
in the second quarter, 3 percent less than a year earlier.

New home loans fell rapidly after Bernanke’s comments and
probably slowed Wells Fargo’s mortgage business, Richard Staite,
a London-based analyst at Atlantic Equities LLP, wrote in a June
12 report. Mortgages comprised about 14 percent of total revenue
last year, a contribution that may plunge by more than a third
this year to $7.5 billion, from $12.2 billion last year, and to
$4.8 billion in 2014, he wrote.

‘Big Change’

“You’re going to see a big change in mortgage profits in
the second half of this year compared to what you’ve seen in
2012 and the first half of this year,” said Kevin Barker, an
analyst at Washington-based Compass Point Research & Trading
LLC.

Dimon, 57, has led JPMorgan to record earnings over the
past three years as the Fed’s stimulus boosted the economy and
bank profits. Mortgage fees and related revenue at the bank
dropped 20 percent to $1.82 billion in the second quarter,
compared with $2.27 billion a year earlier.

If the recent increase in interest rates holds, homeowner
refinancing could be reduced by 30 percent to 40 percent in the
second half of this year, Lake said.

“We’re trying to be clear with you that this would be a
significant event,” she said on the conference call.

“It definitely could be that severe,” Barker said. “2012
and the first half of this year have been historically good
quarters for mortgage banking so I would argue that the market
was already generous for mortgage banks.”

Job Cuts

JPMorgan may accelerate a job-cut program announced earlier
in the year. The bank said in February it’s eliminating as many
as 19,000 jobs in its mortgage and community-banking divisions
through 2014 as Dimon trims expenses.

The company reported a 31 percent increase in second-quarter net income to $6.5 billion, or $1.60 a share, as
a 10 percent jump in trading and investment banking revenue
outweighed a 3 percent drop at the consumer and community
banking unit. Its shares have gained 52 percent in the last
year.

Rising rates and a decline in refinancing could expand
credit availability that’s been restricted following the housing
crash by forcing lenders to compete more aggressively for
homebuyers, said Doug Duncan, chief economist at Washington-based Fannie Mae.

Banks, “if they want to stay in business, they’re going to
compete,” he said last month.

Historic Lows

Mortgage costs are also still near historic lows, with the
rate down from 6.8 percent in 2006, more than 10 percent in 1990
and 18.63 percent in 1981. Housing affordability in January
reached its highest level in records dating to 1989, according
to the National Association of Realtors, and prices are still 26
percent below their peak seven years ago.

U.S. homebuilders have rallied 4.8 percent this month and
are up 30 percent in the last 12 months.

As long as home price appreciation, job growth and easing
of lending standards “continue to move in a positive direction
as expected,” most of the negative effect on housing demand
would be offset, the JPMorgan analysts wrote. Under those
circumstances, homes sales would stay above 4.8 million even
with a 2 percentage point rise in mortgage rates from 2012
levels, creating the highest level of net demand since 2006,
they said.

“The next two months of existing and new home sales will
be critical to see if higher rates will affect the economy,”
said Schmidt. “The current standard view of affordability is
still pretty high and it will take more than 100 basis points to
change that.”

-- With assistance from Dakin Campbell, Megan Hickey and Dawn
Kopecki in New York and Prashant Gopal in Boston: Editors:
Pierre Paulden, Dan Kraut